Forex Quick Guide to Trading Forex

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  • 8/14/2019 Forex Quick Guide to Trading Forex


  • 8/14/2019 Forex Quick Guide to Trading Forex


    The Forex quick guidef or beginners and pr ivat e t raders

    This guide was created by Easy-Forex Trading Platform, and is offered FREEto all Forex traders.

    Make your Forex learning much more efficient:

    Register now at Easy-Forexand get FREE 1-on-1 LIVE training, in your language!

    Joining is free and simple, and it gives you online access to many supporting

    tools, such as Forex outlook, Forex charts, info-center, and more.

    In this book: (click a chapter title below to directly get there)


    Intro How to use this book 3

    1. Forex? What is it, anyway? (a simple introduction, for thevery beginners)


    2. What is Forex trading? What is a Forex deal? 6

    3. What is the global Forex market? 12

    4. Overview of trading Forex online 21

    5. Training for success 25

    6. Technical Analysis: patterns and forecast methods usedtoday


    7. Fundamental Analysis and leading market indicators 478. Day-Trading (on the Easy-Forex Trading Platform) 56

    9. Twenty issues you must consider 61

    10. Tips for every Forex trader 67

    11. Forex glossary 74

    12. Disclaimer (risk warning) 110

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    Introduction: how to use this book

    This book has been developed to help the Forex beginner, though experiencedand professional traders may find it a handy reference.

    Beginners and novice traders are likely to benefit from reading the entire

    text, starting with Chapter 1, which provides a basic overview of what

    currency trading is, and how to get started.

    The chapters are set out in a logical flow, but do not need to be read in order

    to make sense, as each works as a discrete unit unto itself. You may prefer to

    focus first on those chapters that you feel will complement your particular

    knowledge base best. Chapter 11 is a glossary of terms (listed alphabetically)

    used in the Forex business, that will prove helpful as you read this book, andmay serve as a valuable reference as you become an experienced currency


    With the help of this guide, you will soon be ready to start trading Forex in

    fact, with the assistance of the online Easy-Forexteam, you can start today.

    We wish you success in your trading, and hope you find this book interesting,

    helpful and enjoyable.

    Before you start, please remember:

    Forex trading (OTC Trading) involves substantial risk of loss, andmay not be suitable for everyone. Before deciding to undertake such

    transactions, a user should carefully evaluate whether his/her financial

    situation is appropriate for such transactions. Read more in the "RISK

    WARNING" section on Easy-Forex site / Risk Disclaimer.

    Always ask your Forex dealer (the TRADING PLATFORM you wish to

    trade with) the questions we prepared for you in this book (chapter 9).

    Selecting the appropriate Forex TRADING PLATFORM is essential for

    success in handling your trading and monitoring your activity, as well as

    maximizing profits, while minimizing losses and costs.

    Your comments and suggestions are highly appreciated (and may well be

    incorporated in our next edition)! Be our guest and write us:[email protected]

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    [1] Forex? What is it, anyway?

    The market

    The currency trading (foreign exchange, Forex, FX) market is the biggest andfastest growing market on earth. Its daily turnover is more than 2.5 trilliondollars. The participants in this market are central and commercial banks,corporations, institutional investors, hedge funds, and private individuals likeyou.

    What happens in the market?

    Markets are places where goods are traded, and the same goes with Forex. InForex markets, the goods are the currencies of various countries (as well asgold and silver). For example, you might buy euro with US dollars, or you

    might sell Japanese Yen for Canadian dollars. Its as basic as trading onecurrency for another.

    Of course, you dont have to purchase or sell actual, physical currency: youtrade and work with your own base currency, and deal with any currency pairyou wish to.

    Leverage is the Forex advantage

    The ratio of investment to actual value is called leverage. Using a $1,000 tobuy a Forex contract with a $100,000 value is leveraging at a 1:100 ratio.The $1,000 is all you invest and all you risk, but the gains you can make may

    be many times greater.

    How does one profit in the Forex market?

    Obviously, buy low and sell high! The profit potential comes from thefluctuations (changes) in the currency exchange market. Unlike the stockmarket, where share are purchased, Forex trading does not require physicalpurchase of the currencies, but rather involves contracts for amount andexchange rate of currency pairs.

    The advantageous thing about the Forex market is that regular dailyfluctuations in the regular currency exchange markets, often around 1% - are

    multiplied by 100! (Easy-Forexgenerally offers trading ratios from 1:50 to1:200).

    How risky is Forex trading?

    You cannot lose more than your initial investment (also called your margin).The profit you may make is unlimited, but you can never lose more than themargin. You are strongly advised to never risk more than you can afford tolose.

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    How do I start trading?

    If you wish to trade using the Easy-Forex Trading Platform, or any other, youmust first register and then deposit the amount you wish to have in your

    margin account to invest. Registering is easy with Easy-Forex and it acceptspayment via most major credit cards, PayPal, Western Union. Once yourdeposit has been received, you are ready to start trading.

    How do I monitor my Forex trading?

    Online, anywhere, anytime. You have full control to monitor your tradingstatus, check scenarios, change some terms in your Forex deals, close deals,or withdraw profits.

    Easy-Forex wishes you enjoyable and successful Forex trading!

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    [2] What is Forex trading? What is a Forex deal?

    The investor's goal in Forex trading is to profit from foreign currency


    More than 95% of all Forex trading performed today is for speculative purposes

    (e.g. to profit from currency movements). The rest belongs to hedging

    (managing business exposures to various currencies) and other activities.

    Forex trades (trading onboard internet platforms) are non-delivery trades:

    currencies are not physically traded, but rather there are currency contracts

    which are agreed upon and performed. Both parties to such contracts (the

    trader and the trading platform) undertake to fulfill their obligations: one

    side undertakes to sell the amount specified, and the other undertakes to buy

    it. As mentioned, over 95% of the market activity is for speculative purposes,so there is no intention on either side to actually perform the contract (the

    physical delivery of the currencies). Thus, the contract ends by offsetting it

    against an opposite position, resulting in the profit and loss of the parties


    Components of a Forex deal

    A Forex deal is a contract agreed upon between the trader and the market-

    maker (i.e. the Trading Platform). The contract is comprised of the following


    The currency pairs (which currency to buy; which currency to sell)

    The principal amount (or "face", or "nominal": the amount of currency

    involved in the deal)

    The rate (the agreed exchange rate between the two currencies).

    Time frame is also a factor in some deals, but this chapter focuses on Day-

    Trading (similar to Spot or Current Time trading), in which deals have a

    lifespan of no more than a single full day. Thus, time frame does not playinto the equation. Note, however, that deals can be renewed (rolled-over)

    to the next day for a limited period of time.

    The Forex deal, in this context, is therefore an obligation to buy and sell a

    specified amount of a particular pair of currencies at a pre-determined

    exchange rate.

    Forex trading is always done in currency pairs. For example, imagine that the

    exchange rate of EUR/USD (euros to US dollars) on a certain day is 1.1999

    (this number is also referred to as a spot rate, or just rate, for short). If

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    an investor had bought 1,000 euros on that date, he would have paid 1,199.00

    US dollars. If one year later, the Forex rate was 1.2222, the value of the euro

    has increased in relation to the US dollar. The investor could now sell the

    1,000 euros in order to receive 1222.00 US dollars. The investor would then

    have USD 23.00 more than when he started a year earlier.

    However, to know if the investor made a good investment, one needs to compare

    this investment option to alternative investments. At the very minimum, the return

    on investment (ROI) should be compared to the return on a risk-free investment.

    Long-term US government bonds are considered to be a risk-free investment since

    there is virtually no chance of default - i.e. the US government is not likely to go

    bankrupt, or be unable or unwilling to pay its debts.

    Trade only when you expect the currency you are buying to increase in value

    relative to the currency you are selling. If the currency you are buying does

    increase in value, you must sell back that currency in order to lock in theprofit. An open trade (also called an open position) is one in which a trader

    has bought or sold a particular currency pair, and has not yet sold or bought

    back the equivalent amount to complete the deal.

    It is estimated that around 95% of the FX market is speculative. In other

    words, the person or institution that bought or sold the currency has no plan

    to actually take delivery of the currency in the end; rather, they were solely

    speculating on the movement of that particular currency.

    Exchange rate

    Because currencies are traded in pairs and exchanged one against the other

    when traded, the rate at which they are exchanged is called the exchange

    rate. The majority of currencies are traded against the US dollar (USD), which

    is traded more than any other currency. The four currencies traded most

    frequently after the US dollar are the euro (EUR), the Japanese yen (JPY), the

    British pound sterling (GBP) and the Swiss franc (CHF). These five currencies

    make up the majority of the market and are called the major currencies or

    the Majors. Some sources also include the Australian dollar (AUD) within the

    group of major currencies.

    The first currency in the exchange pair is referred to as the base currency.

    The second currency is the counter currency or quote currency. The counter

    or quote currency is thus the numerator in the ratio, and the base currency is

    the denominator.

    The exchange rate tells a buyer how much of the counter or quote currency

    must be paid to obtain one unit of the base currency. The exchange rate also

    tells a seller how much is received in the counter or quote currency when

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    selling one unit of the base currency. For example, an exchange rate for

    EUR/USD of 1.2083 specifies to the buyer of euros that 1.2083 USD must be

    paid to obtain 1 euro.


    It is the difference between BUY and SELL, or BID and ASK. In other words,

    this is the difference between the market maker's "selling" price (to its

    clients) and the price the market maker "buys" it from its clients.

    If an investor buys a currency and immediately sells it (and thus there is no

    change in the rate of exchange), the investor will lose money. The reason for

    this is the spread. At any given moment, the amount that will be received

    in the counter currency when selling a unit of base currency will be lower

    than the amount of counter currency which is required to purchase a unit of

    base currency. For instance, the EUR/USD bid/ask currency rates at your

    bank may be 1.2015/1.3015, representing a spread of 1,000 pips (percentage

    in points; one pip = 0.0001). Such a rate is much higher than the bid/ask

    currency rates that online Forex investors commonly encounter, such as

    1.2015/1.2020, with a spread of 5 pips. In general, smaller spreads are better

    for Forex investors since they require a smaller movement in exchange rates

    in order to profit from a trade.

    Prices, Quotes and Indications

    The price of a currency (in terms of the counter currency), is called Quote.

    There are two kinds of quotes in the Forex market:

    Direct Quote: the price for 1 US dollar in terms of the other currency, e.g.

    Japanese Yen, Canadian dollar, etc.

    Indirect Quote: the price of 1 unit of a currency in terms of US dollars, e.g.

    British pound, euro.

    The market maker provides the investor with a quote. The quote is the pricethe market maker will honor when the deal is executed. This is unlike an

    indication by the market maker, which informs the trader about the market

    price level, but is not the final rate for a deal.

    Cross rates any quote which is not against the US dollar is called cross. For

    example, GBP/JPY is a cross rate, since it is calculated via the US dollar. Here

    is how the GBP/JPY rate is calculated:

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    GBP/USD = 1.7464;

    USD/JPY = 112.29;

    Therefore: GBP/JPY = 112.29 x 1.7464 = 196.10.


    Banks and/or online trading providers need collateral to ensure that the

    investor can pay in the event of a loss. The collateral is called the margin

    and is also known as minimum security in Forex markets. In practice, it is a

    deposit to the trader's account that is intended to cover any currency trading

    losses in the future.

    Margin enables private investors to trade in markets that have high minimum

    units of trading, by allowing traders to hold a much larger position than their

    account value. Margin trading also enhances the rate of profit, but similarly

    enhances the rate of loss, beyond that taken without leveraging.

    Maintenance Margin

    Most trading platforms require a maintenance margin be deposited by the

    trader parallel to the margins deposited for actual trades. The main reason

    for this is to ensure the necessary amount is available in the event of a gap

    or slippage in rates. Maintenance margins are also used to coveradministrative costs.

    When a trader sets a Stop-Loss rate, most market makers cannot guarantee

    that the stop-loss will actually be used. For example, if the market for a

    particular counter currency had a vertical fall from 1.1850 to 1.1900 between

    the close and opening of the market, and the trader had a stop-loss of 1.1875,

    at which rate would the deal be closed? No matter how the rate slippage is

    accounted for, the trader would probably be required to add-up on his initial

    margin to finalize the automatically closed transaction. The funds from the

    maintenance margin might be used for this purpose.

    Important note: Easy-Forex does NOT require that traders deposit a

    maintenance margin. Easy-Forex guarantees the exact rate (Stop-Loss or

    other) as pre-defined by the trader.

    If you dont wish to deposit maintenance margin, in addition to the marginrequired for trading, join Easy-Forex: no maintenance margin, trade

    from as little as $50!

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    Leveraged financing is a common practice in Forex trading, and allows traders

    to use credit, such as a trade purchased on margin, to maximize returns.Collateral for the loan/leverage in the margined account is provided by the

    initial deposit. This can create the opportunity to control USD 100,000 for as

    little as USD 1,000.

    There are five ways private investors can trade in Forex, directly or


    The spot market

    Forwards and futures


    Contracts for difference

    Spread betting

    Please note that this book focuses on the most common way of trading in the

    Forex market, Day-Trading (related to Spot). Please refer to the glossary

    for explanations of each of the five ways investors can trade in Forex.

    A spot transaction

    A spot transaction is a straightforward exchange of one currency for another.

    The spot rate is the current market price, which is also called the benchmark

    price. Spot transactions do not require immediate settlement, or payment

    on the spot. The settlement date, or value date is the second business

    day after the deal date (or trade date) on which the transaction is agreed

    by the trader and market maker. The two-day period provides time to confirm

    the agreement and to arrange the clearing and necessary debiting and

    crediting of bank accounts in various international locations.


    Although Forex trading can lead to very profitable results, there are

    substantial risks involved: exchange rate risks, interest rate risks, credit risks

    and event risks.

    Approximately 80% of all currency transactions last a period of seven days or

    less, with more than 40% lasting fewer than two days. Given the extremely

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    short lifespan of the typical trade, technical indicators heavily influence

    entry, exit and order placement decisions.

    You dont need British pounds or Japanese yens to trade with them. Use yourown account base currency at Easy-Forex.

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    [3] What is the global Forex market?Today, the Forex market is a nonstop cash market where currencies of nations

    are traded, typically via brokers. Foreign currencies are continually and

    simultaneously bought and sold across local and global markets. The value oftraders' investments increases or decreases based on currency movements.

    Foreign exchange market conditions can change at any time in response to

    real-time events.

    The main attractions of short-term currency trading to private investors are:

    24-hour trading, 5 days a week with nonstop access (24/7) to global

    Forex dealers.

    An enormous liquid market, making it easy to trade most currencies.

    Volatile markets offering profit opportunities.

    Standard instruments for controlling risk exposure.

    The ability to profit in rising as well as falling markets.

    Leveraged trading with low margin requirements.

    Many options for zero commission trading.

    A brief history of the Forex marketThe following is an overview into the historical evolution of the foreign

    exchange market and the roots of the international currency trading, from the

    days of the gold exchange, through the Bretton-Woods Agreement, to its

    current manifestation.

    The Gold exchange period and the Bretton-Woods Agreement

    The Bretton-Woods Agreement, established in 1944, fixed national currencies

    against the US dollar, and set the dollar at a rate of USD 35 per ounce of gold.In 1967, a Chicago bank refused to make a loan in pound sterling to a college

    professor by the name of Milton Friedman, because he had intended to use

    the funds to short the British currency. The bank's refusal to grant the loan

    was due to the Bretton-Woods Agreement.

    Bretton-Woods was aimed at establishing international monetary stability by

    preventing money from taking flight across countries, thus curbing speculation

    in foreign currencies. Between 1876 and World War I, the gold exchange

    standard had ruled over the international economic system. Under the gold

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    standard, currencies experienced an era of stability because they were

    supported by the price of gold.

    However, the gold standard had a weakness in that it tended to create boom-

    bust economies. As an economy strengthened, it would import a great deal,running down the gold reserves required to support its currency. As a result,

    the money supply would diminish, interest rates would escalate and economic

    activity would slow to the point of recession. Ultimately, prices of

    commodities would hit rock bottom, thus appearing attractive to other

    nations, who would then sprint into a buying frenzy. In turn, this would inject

    the economy with gold until it increased its money supply, thus driving down

    interest rates and restoring wealth. Such boom-bust patterns were common

    throughout the era of the gold standard, until World War I temporarily

    discontinued trade flows and the free movement of gold.

    The Bretton-Woods Agreement was founded after World War II, in order to

    stabilize and regulate the international Forex market. Participating countries

    agreed to try to maintain the value of their currency within a narrow margin

    against the dollar and an equivalent rate of gold. The dollar gained a premium

    position as a reference currency, reflecting the shift in global economic

    dominance from Europe to the USA. Countries were prohibited from devaluing

    their currencies to benefit export markets, and were only allowed to devalue

    their currencies by less than 10%. Post-war construction during the 1950s,

    however, required great volumes of Forex trading as masses of capital were

    needed. This had a destabilizing effect on the exchange rates established inBretton-Woods.

    In 1971, the agreement was scrapped when the US dollar ceased to be

    exchangeable for gold. By 1973, the forces of supply and demand were in

    control of the currencies of major industrialized nations, and currency now

    moved more freely across borders. Prices were floated daily, with volumes,

    speed and price volatility all increasing throughout the 1970s. New financial

    instruments, market deregulation and trade liberalization emerged, further

    stoking growth of Forex markets.

    The explosion of computer technology that began in the 1980s acceleratedthe pace by extending the market continuum for cross-border capital

    movements through Asian, European and American time zones. Transactions

    in foreign exchange increased rapidly from nearly $70 billion a day in the

    1980s, to more than $2 trillion a day two decades later.

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    The explosion of the euro market

    The rapid development of the Eurodollar market, which can be defined as US

    dollars deposited in banks outside the US, was a major mechanism for

    speeding up Forex trading. Similarly, Euro markets are those where currenciesare deposited outside their country of origin. The Eurodollar market came

    into being in the 1950s as a result of the Soviet Union depositing US dollars

    earned from oil revenue outside the US, in fear of having these assets frozen

    by US regulators. This gave rise to a vast offshore pool of dollars outside the

    control of US authorities. The US government reacted by imposing laws to

    restrict dollar lending to foreigners. Euro markets were particularly attractive

    because they had far fewer regulations and offered higher yields. From the

    late 1980s onwards, US companies began to borrow offshore, finding Euro

    markets an advantageous place for holding excess liquidity, providing short-

    term loans and financing imports and exports.

    London was and remains the principal offshore market. In the 1980s, it

    became the key center in the Eurodollar market, when British banks began

    lending dollars as an alternative to pounds in order to maintain their leading

    position in global finance. London's convenient geographical location

    (operating during Asian and American markets) is also instrumental in

    preserving its dominance in the Euro market.

    Euro-Dollar currency exchangeThe euro to US dollar exchange rate is the price at which the world demand

    for US dollars equals the world supply of euros. Regardless of geographical

    origin, a rise in the world demand for euros leads to an appreciation of the


    Factors affecting the Euro to US dollar exchange rate

    Four factors are identified as fundamental determinants of the real euro to US

    dollar exchange rate:

    The international real interest rate differential between the FederalReserve and European Central Bank

    Relative prices in the traded and non-traded goods sectors

    The real oil price

    The relative fiscal position of the US and Euro zone

    The nominal bilateral US dollar to euro exchange is the exchange rate that

    attracts the most attention. Notwithstanding the comparative importance of

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    bilateral trade links with the US, trade with the UK is, to some extent, more

    important for the euro.

    The following chart illustrates the EUR/USD exchange rate over time, from

    the inauguration of the euro, until mid 2006. Note that each line (theEUR/USD, USD/EUR) is a mirror image of the other, since both are

    reciprocal to one another. This chart is illustrates the steady (general) decline

    of the USD (in terms of euro) from the beginning of 2002 until the end of


    In the long run, the correlation between the bilateral US dollar to euro

    exchange rate, and different measures of the effective exchange rate of

    Euroland, has been rather high, especially when one looks at the effective

    real exchange rate. As inflation is at very similar levels in the US and the Euro

    area, there is no need to adjust the US dollar to euro rate for inflation

    differentials. However, because the Euro zone also trades intensively with

    countries that have relatively high inflation rates (e.g. some countries in

    Central and Eastern Europe, Turkey, etc.), it is more important to downplay

    nominal exchange rate measures by looking at relative price and cost


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    The fall of the US dollar

    The steady and orderly decline of the US dollar from early 2002 to early 2004

    against the euro, Australian dollar, Canadian dollar and a few other currencies

    (i.e. its trade-weighted average, which is what counts for purposes of tradeadjustment), while significant, has still only amounted to about 20 percent.

    There are two reasons why concerns about a free fall of the US dollar may not

    be worth considering. Firstly, the US external deficit will stay high only if US

    growth remains vigorous, and if the US continues to grow strongly, it will also

    retain a strong attraction for foreign capital which, in turn, should support

    the US dollar. Secondly, attempts by the monetary authorities in Asia to keep

    their currencies weak will probably not work in the long run.

    When was the last time the EUR-JPY pair was over 150.00?

    (Have a look at Easy-Forex professional charts).

    The basic theories underlying the US dollar to euro exchange rate

    Law of One Price: In competitive markets, free of transportation cost barriers

    to trade, identical products sold in different countries must sell at the same

    price when the prices are stated in terms of the same currency.Interest rate effects: If capital is allowed to flow freely, exchange rates

    become stable at a point where equality of interest is established.

    The dual forces of supply and demand

    These two reciprocal forces determine euro vs. US dollar exchange rates.

    Various factors affect these two forces, which in turn affect the exchange


    The business environment: Positive indications (in terms of governmentpolicy, competitive advantages, market size, etc.) increase the demand for

    the currency, as more and more enterprises want to invest in its place of


    Stock market: The major stock indices also have a correlation with the

    currency rates, providing a daily read of the mood of the business


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    Political factors: All exchange rates are susceptible to political instability and

    anticipation about new governments. For example, political instability in

    Russia is also a flag for the euro to US dollar exchange, because of the

    substantial amount of German investment in Russia.

    Economic data: Economic data such as labor reports (payrolls, unemployment

    rate and average hourly earnings), consumer price indices (CPI), producer

    price indices (PPI), gross domestic product (GDP), international trade,

    productivity, industrial production, consumer confidence etc., also affect

    currency exchange rates.

    Confidence in a currency is the greatest determinant of the real euro to US

    dollar exchange rate. Decisions are made based on expected future

    developments that may affect the currency.

    Types of exchange rate systems

    An exchange can operate under one of four main types of exchange rate


    Fully fixed exchange rates

    In a fixed exchange rate system, the government (or the central bank acting

    on its behalf) intervenes in the currency market in order to keep the exchange

    rate close to a fixed target. It is committed to a single fixed exchange rate

    and does not allow major fluctuations from this central rate.

    Semi-fixed exchange rates

    Currency can move within a permitted range, but the exchange rate is the

    dominant target of economic policy-making. Interest rates are set to meet

    the target exchange rate.

    Free floating

    The value of the currency is determined solely by supply and demand in the

    foreign exchange market. Consequently, trade flows and capital flows are the

    main factors affecting the exchange rate.

    The definition of a floating exchange rate system is a monetary system in

    which exchange rates are allowed to move due to market forces without

    intervention by national governments. The Bank of England, for example,

    does not actively intervene in the currency markets to achieve a desired

    exchange rate level.

    With floating exchange rates, changes in market supply and demand cause a

    currency to change in value. Pure free floating exchange rates are rare - most

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    governments at one time or another seek to manage the value of their

    currency through changes in interest rates and other means of controls.

    Managed floating exchange rates

    Most governments engage in managed floating systems, if not part of a fixedexchange rate system.

    The advantages of fixed exchange rates

    Fixed rates provide greater certainty for exporters and importers and, under

    normal circumstances, there is less speculative activity - though this depends

    on whether dealers in foreign exchange markets regard a given fixed

    exchange rate as appropriate and credible.

    The advantages of floating exchange rates

    Fluctuations in the exchange rate can provide an automatic adjustment for

    countries with a large balance of payments deficit. A second key advantage of

    floating exchange rates is that it allows the government/monetary authority

    flexibility in determining interest rates as they do not need to be used to

    influence the exchange rate.

    The EUR-USD has dropped? So what!

    (you can profit in any direction it takes, provided you chose the winning direction)

    Who are the participants in todays Forex market?

    In general, there are two main groups in the Forex marketplace:

    Hedgers account for less than 5% of the market, but are the key reason

    futures and other such financial instruments exist. The group using these

    hedging tools is primarily businesses and other organizations participating ininternational trade. Their goal is to diminish or neutralize the impact of

    currency fluctuations.

    Speculators account for more than 95% of the market.

    This group includes private individuals and corporations, public entities,

    banks, etc. They participate in the Forex market in order to create profit,

    taking advantage of the fluctuations of interest rates and exchange rates.

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    The activity of this group is responsible for the high liquidity of the Forex

    market. They conduct their trading by using leveraged investing, making it a

    financially efficient source for earning.

    Market making

    Since most Forex deals are made by (individual and organizational) traders, in

    conjunction with market makers, its important to understand the role of the

    market maker in the Forex industry.

    Questions and answers about 'market making'

    What is a market maker?

    A market maker is the counterpart to the client. The Market Maker does not

    operate as an intermediary or trustee. A Market Maker performs the hedging

    of its clients' positions according to its policy, which includes offsetting

    various clients' positions, and hedging via liquidity providers (banks) and its

    equity capital, at its discretion.

    Who are the market makers in the Forex industry?

    Banks, for example, or trading platforms (such as Easy-Forex), who buy and

    sell financial instruments make the market. That is contrary to

    intermediaries, which represent clients, basing their income on commission.

    Do market makers go against a client's position?

    By definition, a market maker is the counterpart to all its clients' positions,

    and always offers a two-sided quote (two rates: BUY and SELL). Therefore,

    there is nothing personal between the market maker and the customer.

    Generally, market makers regard all of the positions of their clients as a

    whole. They offset between clients' opposite positions, and hedge their net

    exposure according to their risk management policies and the guidelines of

    regulatory authorities.

    Do market makers and clients have a conflict of interest?

    Market makers are not intermediaries, portfolio managers, or advisors, who

    represent customers (while earning commission). Instead, they buy and sell

    currencies to the customer, in this case the trader. By definition, the market

    maker always provides a two-sided quote (the sell and the buy price), and

    thus is indifferent in regards to the intention of the trader. Banks do that, as

    do merchants in the markets, who both buy from, and sell to, their

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    customers. The relationship between the trader (the customer) and the

    market maker (the bank; the trading platform; Easy-Forex; etc.) is simply

    based on the fundamental market forces of supply and demand.

    Can a market maker influence market prices against a clients position?

    Definitely not, because the Forex market is the nearest thing to a perfect

    market (as defined by economic theory) in which no single participant is

    powerful enough to push prices in a specific direction. This is the biggest

    market in the world today, with daily volumes reaching 3 trillion dollars. No

    market maker is in a position to effectively manipulate the market.

    What is the main source of earnings for Forex market makers?

    The major source of earnings for market makers is the spread between the bid

    and the ask prices. Easy-Forex Trading Platform, for instance, maintains

    neutrality regarding the direction of any or all deals made by its traders; it

    earns its income from the spread.

    How do market makers manage their exposure?

    The way most market makers hedge their exposure is to hedge in bulk. They

    aggregate all client positions and pass some, or all, of their net risk to their

    liquidity providers. Easy-Forex, for example, hedges its exposure in this

    fashion, in accordance with its risk management policy and legal


    For liquidity, Easy-Forex works in cooperation with world's leading banks

    providing liquidity to the Forex industry: UBS (Switzerland) and RBS (Royal

    Bank of Scotland).

    Easy-Forex guarantees the accuracy, security and integrity of all

    transactions.Read more here

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    [4] Overview of trading Forex online

    How a Forex system operates in real timeOnline foreign exchange trading occurs in real time. Exchange rates are

    constantly changing, in intervals of seconds. Quotes are accurate for the time

    they are displayed only. At any moment, a different rate may be quoted.

    When a trader locks in a rate and executes a transaction, that transaction is

    immediately processed; the trade has been executed.

    Up-to-date exchange rates

    As rates change so rapidly, any Forex software must display the most up-to-date rates. To accomplish this, the Forex software is continuously

    communicating with a remote server that provides the most current exchange

    rates. The rates quoted, unlike traditional bank exchange rates, are actual

    tradable rates. A trader may choose to lock in to a rate (called the freeze

    rate) only as long as it is displayed.

    Trading online on Forex platforms

    The internet revolution caused a major change in the way Forex trading isconducted throughout the world.

    Until the advent of the internet-Forex age at the end of the 1990s, Forex

    trading was conducted via phone orders (or fax, or in-person), posted to

    brokers or banks. Most of the trading could be executed only during business

    hours. The same was true for most activities related to Forex, such as making

    the deposits necessary for trading, not to mention profit taking. The internet

    has radically altered the Forex market, enabling around the clock trading and

    conveniences such as the use of credit cards for fund deposits.

    Forex on the internet: basic steps

    In general, the individual Forex trader is required to fulfill two steps prior to


    Register at the trading platform

    Deposit funds to facilitate trading

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    Requirements vary with each trading platform, but these steps bear further



    Registration is done online by the individual trader. There are various forms

    used in the industry. Some are quite simple, where others are longer and

    more time-consuming. In part, this can be attributed to governmental or

    other authorities requirements, though some Forex platforms require more

    information than is actually needed. Some even require a face-to-face

    meeting, or to obtain hard copies of required documents such as a passport,

    or drivers license.

    The key requirements for registration are the traders full name, telephone,

    e-mail address, residence, and sometimes also the traders yearly income or

    capital (equity) and an ID number (passport / drivers license / SSN / etc.).

    Typically, the Forex platform is not required to run a thorough check, but rely

    on the registrant to be truthful. Nevertheless, each Forex platform conducts

    certain routines, in order to check and verify the authenticity of the details


    Registrants are required to declare that funds used for trading are not in

    question, and are not the result of any criminal act or money laundering

    activity. This is mandatory as part of a global anti-money laundering effort.

    It is advised that the reader becomes familiar with Anti-Money Laundering

    regulations, and the procedures associated with the prevention of this

    criminal activity.

    Depositing funds

    New registrants must deposit funds to facilitate trading. However, themajority of the Forex platforms today require that, in addition to funds used

    for actual trading, an additional amount be deposited. Often called

    maintenance margin or activity collateral, its purpose is for the platform

    to have an additional guarantee. Some of the platforms that require an

    additional deposit do pay interest on the collateral, which is frozen under

    the traders name.

    The Easy-ForexTrading Platform does NOT require any additional guarantee,

    and allows trading with 100% of the amount deposited. Easy-Forex is able to

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    provide these advantages because it assures guaranteed rates and Stop-

    Loss. That means that there will never be any additional requirement for

    funds as a result of a gap that causes you to surpass the Stop-Loss. See 20

    issues you must consider (Chapter 9) for more.

    Trading online

    The trading platform operates 24 hours a day just as the global Forex market

    runs around the clock.

    However, many online Forex market makers require the download and

    installation of software specific to their own trading platform. Consequently,

    accessibility is limited to those terminals that have the software. Since Forex

    trading is borderless, and may be performed at any given time, it is obviously

    advantageous to have access to trading from as many locations as possible.

    The Easy-ForexTrading Platform is a fully web-based system, which means

    trading can be conducted from any computer connected to the internet.

    Traders are only required to log-in, ensure they have available funds to trade,

    or make new deposits, and commence trading.

    The Trading Platform: real-time software

    The main feature of any Forex trading platform is real time access to

    exchange rates, to deal and order making, to deposits and withdrawals, andto monitoring the status of positions and ones account.

    The Easy-ForexTrading Platform system uses web services to continuously

    fetch the most current exchange rates. The most recent data displays without

    the need for a page refresh. This includes account status screens such as My

    Position, which updates continually to reflect changes in rates and other real

    time elements.

    Easy-Forex guarantees the accuracy, security and integrity of alltransactions.Read more here

    Transaction processing and storage

    As soon as a transaction is executed, the relevant data is processed securely

    and sent to the data server where it is stored. A backup is created on a

    different server farm, to ensure data integrity and continuity. All of this

    happens in real time, with no human intervention.

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    Trading via brokers and dealing rooms (by phone)

    Performing Forex trading via Dealing Room dealers (over the phone) requires

    knowledge about the way dealing rooms work, and the terminologies used inthe course of trading.

    At start, the client should specify whether he/she is interested in obtaining a

    QUOTE (in order to make a deal) or just an INDICATION. In the case of an

    indication, the price given does not bind the dealer, but rather provides

    information about market conditions.

    When asking for QUOTE, the trader must specify the currency pair and the

    deal amount (volume). For example: Need a quote for EUR/USD in


    It is wise to withhold from the dealer the intended direction of the deal,

    specifying the pair only. Accordingly, the dealer then provides a quote

    comprising two prices, buy and sell (both sides quote). The quote binds the

    dealer for the very second it is given. If the trader does not immediately ask

    for execution, then the price is no longer in force. The dealer would then tell

    the customer risk, or change, meaning the price quoted is no longer in

    force. In such case, the trader should ask for a new price.

    On the other hand, in order to make a deal, the trader must proclaim buy

    or sell, together with the currency (or the price).An example:

    The trader asks for a quote for EUR/USD.

    The dealer says 1.2010/15.

    If the trader wants to buy EUR, he/she says buy" (or "buy EURO, or


    If the trader wants to sell EUR, he/she says sell" (or "sell EURO, or


    The moment the trader says buy (or sell) he/she is bound to the deal,

    regardless of the market situation.

    Banks are closed at nights, weekends and holidays. Trade, deposit and

    withdraw at Easy-Forex, 24x7

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    [5] Training for success

    Understanding the nuances of the Forex market requires experience andtraining, but is critical to success. In fact, ongoing learning is as important to

    the veteran trader as it is to the beginner. The foreign currency market is

    massive, and the key to success is knowledge. Through training, observation

    and practice, you can learn how to identify and understand where the Forex

    market is going, and what controls that direction.

    To invest in the right currencies at the right time in a large, nonstop and

    global trading arena, there is much to learn. Forex markets move quickly and

    can take new directions from moment to moment. Forex training helps you

    assess when to enter a currency based on the direction it is taking, and howto forecast its direction for the near future.

    Training with Easy-Forex

    Easy-Forex offers one of the most effective forms of training through hands-

    on experience. For as little as USD 25 at risk per trade, you can start trading

    while learning in real-time. Easy-Forex strongly recommends starting with

    very small volumes, and depositing an amount to cover a series of trades.

    Learn the basics of the foreign exchange market, trading terminology,

    advanced technical analysis, and how to develop successful trading strategies.Discover how the Forex market offers more opportunities for quick financial

    gains than almost any other market.

    To learn more about the trading advantages of Easy-Forex, join Easy-Forex

    (registration is quick and free, no obligation)

    The many available resources and tools to train yourself

    There are many free tools and resources available in the market, particularly

    online. Among these, you will find:


    There are many kinds of charts (see Chapter 6, Technical Analysis). Start with

    simple charts. Try to identify trends and major changes, and try to relate

    them to technical patterns as well as to macro events (news, either financial

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    or political). Make an effort to determine the general magnitude of each

    change on the chart (meaning: what is the $ value of the change, if you were

    trading at that point).

    Guided toursMost platforms provide guided tours, demos or tutorials, either online or via


    News / breaking news

    Keep abreast of world news. Read all the headlines, particularly those directly

    related to Forex. Check the impact of such news, if any, on the charts.

    Forex outlooks

    Read daily/weekly outlooks posted on Forex or general financial sites. Many

    include alerts to upcoming reports and events such as market indicators and

    interest rate decisions.

    To read todays professional outlook and view detailed charts, join Easy-

    Forex (registration is quick and free, no obligation)


    Read forecasts, some of which are available free of charge. Bear in mind that

    forecasts and predictions are made by people, none of whom can guarantee

    the occurrence of future events


    Follow the indices of the leading markets (e.g. Dow-Jones, NASDAQ; Nikkei;

    etc.). Compare them to the changes in the Forex market, as well as to

    changes in particular currency pairs.

    Economic indicatorsPay attention to the release of economic indicators (for example the

    monthly unemployment rate in the USA), and try to identify their impact on

    the market in general, and on specific currency pairs in particular.


    Dont hesitate to browse Forex glossaries, which are offered free on many

    platforms. A given word may have different meaning as it relates to Forex and

    to the terminology used by the Forex market participants.

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    Seminars and courses

    Try to attend professional Forex seminars. Some seminars are offered free,

    often as part of a client recruitment process by a given platform; many are,

    nevertheless, worth attending. Educational courses are offered online and bymany post-secondary institutions.

    Forex books

    Read, or even just browse. Many books are offered free, or as part of a

    service package to the trader. For many, historical background and technical

    analysis are topics better covered in books than in an educational setting.

    Internet forums / blogs

    Visit and participate in Forex forums. This gives you an opportunity to learn

    from the experience of others. Of course, remember that some forumparticipants may be biased, promoting a given Forex platform or their own


    No commissions? How about profit withdrawal fees?

    (No hidden costs at Easy-Forex. Join and trade without banking costs or other

    indirect costs. Read more: - Spreads and Commissions)

    So much to consider

    To succeed as a Forex trader, you must take into consideration a wide variety

    of factors such as:

    spread (pips);

    commissions and fees;

    ease of access to the trading platform;

    minimum amounts needed for trading;

    additional amounts needed (if any);

    control over activity and positions; the platform software requirements;

    ease of deposits and withdrawals;

    personal service and support provided by the platform;

    the platforms business partners;

    the platforms management, offices and outreach;

    the products offered onboard the platform; and many others.

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    Online training, no downloads

    Easy-Forex is dedicated to educating its customers. Customers can access

    FREE one-on-one online training. The training goal is to teach people specific

    strategies for trading currencies over the internet. Both novice investors andexpert day traders have benefited from the training provided by Easy-Forex.

    The demo account idea

    Many Forex platforms offer new registrants a demo account. A typical

    example would provide 10,000 demo dollars that can be traded as a

    means of learning how to succeed in Forex.

    Easy-Forex does not offer demo accounts. Coming to understand that

    reason must rule over emotion is the most important lesson a trader canlearn, and it cannot be done with play money. If there is no consequence to

    indulging in emotional responses to the market, there is no learning, so

    demo accounts tend to have little educational value. Rather, Easy-Forex

    allows you to start trading with just $50, including full access to one-on-one

    training. New registrants are thus able to garner both an educational and

    experiential benefit unavailable through simulated situations.

    To get personal assistance and free training,

    Join Easy-Forex (registration is quick and free, no obligation)

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    [6] Technical Analysis:

    Patterns and forecast methods used today

    Basic Forex forecast methods:

    Technical analysis and fundamental analysis

    This chapter and the next one provide insight into the two major methods of

    analysis used to forecast the behavior of the Forex market. Technical analysis

    and fundamental analysis differ greatly, but both can be useful forecasting

    tools for the Forex trader. They have the same goal - to predict a price or

    movement. The technician studies the effects, while the fundamentalist

    studies the causes of market movements. Many successful traders combine amixture of both approaches for superior results.

    If both Fundamental analysis and Technical analysis point to the same

    direction, your chances for profitable trading are better.

    In this chapter

    The categories and approaches in Forex Technical Analysis all aim to support

    the investor in determining his/her views and forecasts regarding the

    exchange rates of currency pairs. This chapter describes the approaches,methods and tools used to this end. However, this chapter does not intend to

    provide a comprehensive and/or professional level of knowledge and skill, but

    rather let the reader become familiar with the terms and tools used by

    technical analysts.

    As there are many ways to categorize the tools available, the description of

    tools in this chapter may sometimes seem repetitive. The sections in this

    chapter are:

    [6.1] Technical Analysis: background, advantages, disadvantages;

    [6.2] Various techniques and terms;[6.3] Charts and diagrams;

    [6.4] Technical Analysis categories / approaches:a. Price indicators;b. Number theory;

    c. Waves;d. Gaps;

    e. Trends;[6.5] Some other popular tools.

    [6.6] Another way to categorize Technical Indicators.

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    [6.1] Technical analysis

    Technical analysis is a method of predicting price movements and future

    market trends by studying what has occurred in the past using charts.

    Technical analysis is concerned with what has actually happened in themarket, rather than what should happen, and takes into account the price of

    instruments and the volume of trading, and creates charts from that data as a

    primary tool. One major advantage of technical analysis is that experienced

    analysts can follow many markets and market instruments simultaneously.

    Technical analysis is built on three essential principles:

    1. Market action discounts everything! This means that the actual price is a

    reflection of everything that is known to the market that could affect it.

    Some of these factors are: fundamentals (inflation, interest rates, etc.),

    supply and demand, political factors and market sentiment. However, the

    pure technical analyst is only concerned with price movements, not with the

    reasons for any changes.

    2. Prices move in trends. Technical analysis is used to identify patterns of

    market behavior that have long been recognized as significant. For many

    given patterns there is a high probability that they will produce the expected

    results. There are also recognized patterns that repeat themselves on a

    consistent basis.

    3. History repeats itself. Forex chart patterns have been recognized andcategorized for over 100 years, and the manner in which many patterns are

    repeated leads to the conclusion that human psychology changes little over

    time. Since patterns have worked well in the past, it is assumed that they will

    continue to work well into the future.

    Disadvantages of Technical Analysis

    Some critics claim that the Dow approach (prices are not random) is

    quite weak, since todays prices do not necessarily project future


    The critics claim that signals about the changing of a trend appear too

    late, often after the change had already taken place. Therefore,

    traders who rely on technical analysis react too late, hence losing

    about 1/3 of the fluctuations;

    Analysis made in short time intervals may be exposed to noise, and

    may result in a misreading of market directions;

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    The use of most patterns has been widely publicized in the last several

    years. Many traders are quite familiar with these patterns and often act

    on them in concern. This creates a self-fulfilling prophecy, as waves of

    buying or selling are created in response to bullish or bearish


    Advantages of Technical Analysis

    Technical analysis can be used to project movements of any asset

    (which is priced under demand/supply forces) available for trade in the

    capital market;

    Technical analysis focuses on what is happening, as opposed to what

    has previously happened, and is therefore valid at any price level; The technical approach concentrates on prices, which neutralizes

    external factors. Pure technical analysis is based on objective tools

    (charts, tables) while disregarding emotions and other factors;

    Signaling indicators sometimes point to the imminent end of a trend,

    before it shows in the actual market. Accordingly, the trader can

    maintain profit or minimize losses.

    Be disciplined, dont be greedy.Close your Forex the position as you originally planned.

    [6.2] Various techniques and terms

    Many different techniques and indicators can be used to follow and predict

    trends in markets. The objective is to predict the major components of the

    trend: its direction, its level and the timing. Some of the most widely known


    Bollinger Bands - a range of price volatility named after John Bollinger,who invented them in the 1980s. They evolved from the concept of

    trading bands, and can be used to measure the relative height or depth

    of price. A band is plotted two standard deviations away from a simple

    moving average. As standard deviation is a measure of volatility,

    Bollinger Bands adjust themselves to market conditions. When the

    markets become more volatile, the bands widen (move further away

    from the average), and during less volatile periods, the bands contract

    (move closer to the average).

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    Bollinger Bands are one of the most popular technical analysis

    techniques. The closer prices move to the upper band, the more

    overbought is the market, and the closer prices move to the lower

    band, the more oversold is the market.

    Support / Resistance The Support level is the lowest price an

    instrument trades at over a period of time. The longer the price stays

    at a particular level, the stronger the support at that level. On the

    chart this is price level under the market where buying interest is

    sufficiently strong to overcome selling pressure. Some traders believe

    that the stronger the support at a given level, the less likely it will

    break below that level in the future. The Resistance level is a price at

    which an instrument or market can trade, but which it cannot exceed,

    for a certain period of time. On the chart this is a price level over the

    market where selling pressure overcomes buying pressure, and a priceadvance is turned back.

    Support / Resistance Breakout - when a price passes through and stays

    beyond an area of support or resistance.

    CCI - Commodity Channel Index - an oscillator used to help determine

    when an investment instrument has been overbought and oversold. The

    Commodity Channel Index, first developed by Donald Lambert,

    quantifies the relationship between the asset's price, a moving average

    (MA) of the asset's price, and normal deviations (D) from that average.

    The CCI has seen substantial growth in popularity amongst technical

    investors; today's traders often use the indicator to determine cyclical

    trends in equities and currencies as well as commodities.

    The CCI, when used in conjunction with other oscillators, can be a

    valuable tool to identify potential peaks and valleys in the asset's price,

    and thus provide investors with reasonable evidence to estimate

    changes in the direction of price movement of the asset.

    Hikkake Pattern a method of identifying reversals and continuation

    patterns. Used for determining market turning-points and continuations(also known as trending behavior). It is a simple pattern that can be

    viewed in market price data, using traditional bar charts, or Japanese

    candlestick charts.

    Moving averages - are used to emphasize the direction of a trend and to

    smooth out price and volume fluctuations, or noise, that can confuse

    interpretation. There are seven different types of moving averages:

    simple (arithmetic)


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    time series




    volume adjusted

    The only significant difference between the various types of moving

    averages is the weight assigned to the most recent data. For example,

    a simple (arithmetic) moving average is calculated by adding the

    closing price of the instrument for a number of time periods, then

    dividing this total by the number of time periods.

    The most popular method of interpreting a moving average is to

    compare the relationship between a moving average of the

    instruments closing price, and the instruments closing price itself. Sell signal: when the instruments price falls below its moving


    Buy signal: when the instruments price rises above its moving


    The other technique is called the double crossover, which uses short-

    term and long-term averages. Typically, upward momentum is

    confirmed when a short-term average (e.g., 15-day) crosses above a

    longer-term average (e.g., 50-day). Downward momentum is confirmedwhen a short-term average crosses below a long-term average.

    MACD - Moving Average Convergence/Divergence - a technical

    indicator, developed by Gerald Appel, used to detect swings in the

    price of financial instruments. The MACD is computed using two

    exponentially smoothed moving averages (see further down) of the

    security's historical price, and is usually shown over a period of time on

    a chart. By then comparing the MACD to its own moving average

    (usually called the "signal line"), traders believe they can detect when

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    the security is likely to rise or fall. MACD is frequently used in

    conjunction with other technical indicators such as the RSI (Relative

    Strength Index, see further down) and the stochastic oscillator (see

    further down).

    Momentum is an oscillator designed to measure the rate of price

    change, not the actual price level. This oscillator consists of the net

    difference between the current closing price and the oldest closing

    price from a predetermined period.

    The formula for calculating the momentum (M) is:

    M = CCP OCP

    Where: CCP current closing price

    OCP old closing price

    Momentum and rate of change (ROC) are simple indicators showing

    the difference between today's closing price and the close N days ago.

    "Momentum" is simply the difference, and the ROC is a ratio expressed

    in percentage. They refer in general to prices continuing to trend. The

    momentum and ROC indicators show that by remaining positive, while

    an uptrend is sustained, or negative, while a downtrend is sustained.

    A crossing up through zero may be used as a signal to buy, or a crossing

    down through zero as a signal to sell. How high (or how low, when

    negative) the indicators get shows how strong the trend is. RSI - Relative Strength Index - a technical momentum indicator,

    devised by Welles Wilder, measures the relative changes between the

    higher and lower closing prices. RSI compares the magnitude of recent

    gains to recent losses in an attempt to determine overbought and

    oversold conditions of an asset.

    The formula for calculating RSI is:

    RSI = 100 [100 / (1 + RS)]

    Where: RS - average of N days up closes, divided byaverage of N days down closes

    N - predetermined number of days

    The RSI ranges from 0 to 100. An asset is deemed to be overbought

    once the RSI approaches the 70 level, meaning that it may be getting

    overvalued and is a good candidate for a pullback. Likewise, if the RSI

    approaches 30, it is an indication that the asset may be getting

    oversold and therefore likely to become undervalued. A trader using

    RSI should be aware that large surges and drops in the price of an asset

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    will affect the RSI by creating false buy or sell signals. The RSI is best

    used as a valuable complement to other stock-picking tools.

    Stochastic oscillator - A technical momentum indicator that compares

    an instrument's closing price to its price range over a given time period.The oscillator's sensitivity to market movements can be reduced by

    adjusting the time period, or by taking a moving average of the result.

    This indicator is calculated with the following formula:

    %K = 100 * [(C L14) / (H14 L14)]C= the most recent closing price;

    L14= the low of the 14 previous trading sessions;

    H14= the highest price traded during the same 14-day period.

    The theory behind this indicator, based on George Lanes observations,

    is that in an upward-trending market, prices tend to close near theirhigh, and during a downward-trending market, prices tend to close

    near their low. Transaction signals occur when the %K crosses through a

    three-period moving average called the %D.

    Trend line - a sloping line of support or resistance.

    Up trend line straight line drawn upward to the right along

    successive reaction lows

    Down trend line straight line drawn downwards to the right

    along successive rally peaksTwo points are needed to draw the trend line, and a third point to

    make it valid trend line. Trend lines are used in many ways by traders.

    One way is that when price returns to an existing principal trend line it

    may be an opportunity to open new positions in the direction of the

    trend in the belief that the trend line will hold and the trend will

    continue further. A second way is that when price action breaks

    through the principal trend line of an existing trend, it is evidence that

    the trend may be going to fail, and a trader may consider trading in the

    opposite direction to the existing trend, or exiting positions in the

    direction of the trend.

    Dont fall in love with your Forex position.

    Never take revenge of your Forex position.

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    [6.3] Charts and diagrams

    Forex charts are based on market action involving price. Charts are major

    tools in Forex trading. There are many kinds of charts, each of which helps to

    visually analyze market conditions, assess and create forecasts, and identifybehavior patterns.

    Most charts present the behavior of currency exchange rates over time. Rates

    (prices) are measured on the vertical axis and time is shown of the horizontal


    Charts are used by both technical and fundamental analysts. The technical

    analyst analyzes the micro movements, trying to match the actual

    occurrence with known patterns. The fundamental analyst tries to find

    correlation between the trend seen on the chart and macro events

    occurring parallel to that (political and others).

    What is an appropriate time scale to use on a chart?

    It depends on the traders strategy. The short-range investor would probably

    select a day chart (units of hours, minutes), where the medium and long-

    range investor would use the weekly or monthly charts. High resolution charts

    (e.g. minutes and seconds) may show noise, meaning that with fine details

    in view, it is sometimes harder to see the overall trend.

    The major types of charts:

    Line chart

    The simplest

    form, based upon

    the closing rates

    (in each time

    unit), forming a


    line. (Such chart,

    on the 5-minutes

    scale, will show aline connecting all

    the actual rates

    every 5 minutes).

    This chart does not show what happened during the time unit selected

    by the viewer, only closing rates for such time intervals. The line chart

    is a simple tool for setting support and resistance levels.

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    Point and figure charts - charts based on price without time. Unlike

    most other investment charts, point and figure charts do not present a

    linear representation of time. Instead, they show trends in price.

    Increases are represented by a rising stack of Xs, and decreases arerepresented by a declining stack of Os. This type of chart is used to

    filter out non-significant price movements, and enables the trader to

    easily determine critical support and resistance levels. Traders will

    place orders when the price moves beyond identified support /

    resistance levels.

    Bar chart

    This chart shows three

    rates for each time

    unit selected: the high,

    the low, the closing

    (HLC). There are also

    bar charts including

    four rates (OHLC,

    which includes theOpening rate for the

    time interval). This

    chart provides clearly

    visible information

    about trading prices

    range during the time

    period (per unit)


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    Candlestick chart

    This kind of chart is based on an ancient Japanese method. The chart

    represents prices at their opening, high, low and closing rates, in aform of candles, for each time unit selected.

    The empty (transparent) candles show increase, while the dark (full)

    ones show decrease.

    The length of the body shows the range between opening and closing,

    while the whole candle (including top and bottom wicks) show the

    whole range of trading prices for the selected time unit.

    Following is a candlestick chart (USD/JPY) with some explanations:

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    Pattern recognition in Candlestick charts

    Pattern recognition is a field within the area of machine learning.

    Alternatively, it can be defined as the act of taking in raw data and taking anaction based on the category of the data. As such, it is a collection of

    methods for supervised learning.

    A complete pattern recognition system consists of a sensor that gathers the

    observations to be classified or described; a feature extraction mechanism

    that computes numeric or symbolic information from the observations; and a

    classification or description scheme that does the actual job of classifying or

    describing observations, relying on the extracted features.

    In general, the market uses the following patterns in candlestick charts:

    Bullish patterns: hammer, inverted hammer, engulfing, harami, harami

    cross, doji star, piercing line, morning star, morning doji star.

    Bearish patterns: shooting star , hanging man, engulfing, harami,

    harami cross, doji star, dark cloud cover, evening star, evening doji


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    Chart system available at Easy-ForexTrading Platform

    The Easy-Forex Trading Platform offers the following charting tools, for both

    professional and beginner traders.

    The chart types:

    The time scales:

    The view types:

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    The "drawing line on the chart" types:

    The Study types:

    Please note: the above screen-shots were taken around mid-2006. The Easy-Forex

    platform continuously upgrades its system, while adding new features on a regular


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    [6.4] Technical Analysis categories / approaches

    Technical Analysis can be divided into five major categories:

    Price indicators (oscillators, e.g.: Relative Strength Index (RSI))

    Number theory (Fibonacci numbers, Gann numbers)

    Waves (Elliott's wave theory)

    Gaps (high-low, open-closing)

    Trends (following moving average).

    [a] Price indicators

    Relative Strength Index (RSI): The RSI measures the ratio of up-moves todown-moves and normalizes the calculation, so that the index is expressed in

    a range of 0-100. If the RSI is 70 or greater, then the instrument is assumed to

    be overbought (a situation in which prices have risen more than market

    expectations). An RSI of 30 or less is taken as a signal that the instrument may

    be oversold (a situation in which prices have fallen more than the market


    Stochastic oscillator: This is used to indicate overbought/oversold conditions

    on a scale of 0-100%. The indicator is based on the observation that in a

    strong up-trend, period closing prices tend to concentrate in the higher partof the period's range. Conversely, as prices fall in a strong down-trend, closing

    prices tend to be near the extreme low of the period range. Stochastic

    calculations produce two lines, %K and %D, that are used to indicate

    overbought/oversold areas of a chart. Divergence between the stochastic

    lines and the price action of the underlying instrument gives a powerful

    trading signal.

    Moving Average Convergence/Divergence (MACD): This indicator involves

    plotting two momentum lines. The MACD line is the difference between two

    exponential moving averages and the signal or trigger line, which is an

    exponential moving average of the difference. If the MACD and trigger lines

    cross, then this is taken as a signal that a change in the trend is likely.

    [b] Number theory:

    Fibonacci numbers: The Fibonacci number sequence (1, 1, 2, 3, 5, 8, 13, 21,

    34 ...) is constructed by adding the first two numbers to arrive at the third.

    The ratio of any number to the next larger number is 61.8%, which is a

    popular Fibonacci retracement number. The inverse of 61.8%, which is 38.2%,

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    is also used as a Fibonacci retracement number (as well as extensions of that

    ratio, 161.8%, 261.8%). Wave patterns and behavior, identified in Forex

    trading, correlate (to some extent) with relations within the Fibonacci series.

    The tool is used in technical analysis that combines various numbers of

    Fibonacci retracements, all of which are drawn from different highs and lows.Fibonacci clusters are indicators which are usually found on the side of a price

    chart and look like a series of horizontal bars with various degrees of shading.

    Each retracement level that overlaps with another, makes the horizontal bar

    on the side darker at that price level. The most significant levels of support

    and resistance are found where the Fibonacci cluster is the darkest. This tool

    helps gauging the relative strength of the support or resistance of various

    price levels in one quick glance. Traders often pay close attention to the

    volume around the identified levels to confirm the strength of the

    support/resistance.Gann numbers: W.D. Gann was a stock and a commodity trader working in

    the '50s, who reputedly made over $50 million in the markets. He made his

    fortune using methods that he developed for trading instruments based on

    relationships between price movement and time, known as time/price

    equivalents. There is no easy explanation for Gann's methods, but in essence

    he used angles in charts to determine support and resistance areas, and to

    predict the times of future trend changes. He also used lines in charts to

    predict support and resistance areas.

    [c] Waves

    Elliott's wave theory: The Elliott Wave Theory is an approach to market

    analysis that is based on repetitive wave patterns and the Fibonacci number

    sequence. An ideal Elliott wave pattern shows a five-wave advance followed

    by a three-wave decline.

    [d] Gaps

    Gaps are spaces left on the bar chart where no trading has taken place.

    Gaps can be created by factors such as regular buying or selling pressure,

    earnings announcements, a change in an analyst's outlook or any other type of

    news release.

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    An up gap is formed when the lowest price on a trading day is higher than the

    highest high of the previous day. A down gap is formed when the highest price

    of the day is lower than the lowest price of the prior day. An up gap is usually

    a sign of market strength, while a down gap is a sign of market weakness. A

    breakaway gap is a price gap that forms on the completion of an important

    price pattern. It usually signals the beginning of an important price move. A

    runaway gap is a price gap that usually occurs around the mid-point of an

    important market trend. For that reason, it is also called a measuring gap. An

    exhaustion gap is a price gap that occurs at the end of an important trend and

    signals that the trend is ending.

    [e] Trends

    A trend refers to the direction of prices. Rising peaks and troughs constitute

    an up trend; falling peaks and troughs constitute a downtrend that determines

    the steepness of the current trend. The breaking of a trend line usually signals

    a trend reversal. Horizontal peaks and troughs characterize a trading range.

    In general, Charles Dow categorized trends into 3 categories: (a) Bull trend

    (up-trend: a series of highs and lows, where each high is higher than the

    previous one); (b) Bear trend (down-trend: a series of highs and lows, where

    each low is lower than the previous one); (c) Treading trend (horizontal-trend: a series of highs and lows, where peaks and lows are around the same

    as the previous peaks and lows).

    Moving averages are used to smooth price information in order to confirm

    trends and support-and-resistance levels. They are also useful in deciding on a

    trading strategy, particularly in futures trading or a market with a strong up

    or down trend. Recognizing a trend may be done using standard deviation,

    which is a measure of volatility. Bollinger Bands, for example, illustrate

    trends with this approach. When the markets become more volatile, the

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    bands widen (move further away from the average), while during less volatile

    periods, the bands contract (move closer to the average).

    Various Trend lines

    Pattern recognition in Trend lines, which detect and draw the followingpatterns: ascending; descending; symmetrically & extended triangles;

    wedges; trend channels.

    [6.5] Some other popular technical tools:

    Coppock Curve is an investment tool used in technical analysis for predicting

    bear market lows. It is calculated as a 10-month weighted moving average of

    the sum of the 14-month rate of change and the 11-month rate of change for

    the index.

    DMI (Directional Movement Indicator) is a popular technical indicator used to

    determine whether or not a currency pair is trending.

    The Parabolic System (SAR) is a stop-loss system based on price and time. It

    is used to determine good exit and entry points.

    You are almost ready to trade in real-time, but you want to discusssomething online. Chat with an Easy-Forex expert.

    [6.6] Another way to categorize Technical Indicators:

    The indicators and tools aim to provide information in various approaches:

    Cycle indicators

    A cycle is a term to indicate repeating patterns of market movement,

    specific to recurrent events, such as seasons, elections, etc. Many

    markets have a tendency to move in cyclical patterns. Cycle indicatorsdetermine the timing of a particular market patterns. (Example: Elliott


    Momentum indicators

    Momentum is a general term used to describe the speed at which prices

    move over a given time period. Momentum indicators determine the

    strength or weakness of a trend as it progresses over time. Momentum is

    highest at the beginning of a trend and lowest at trend turning points. Any

    divergence of directions in price and momentum is a warning of weakness;

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